'Capping air fares on regional routes negative for airlines'

'The levy proposed to be charged on air tickets for regional connectivity fund would marginally increase cost.'

The new civil aviation policy has an integrated approach to take flying to the masses, but the move to cap fares for one-hour flights on unserved regional routes at Rs 2,500 is likely to be a negative for airline companies, says a report.

Crisil Research also said the 5/20 rule that barred new airlines from flying abroad has been replaced with the 0/20 norm that "levels the field".

As per the 5/20 rule, only domestic airlines with at least five years of operational experience and a minimum of 20 planes were allowed to fly overseas.

Unveiled by the government on Wednesday, the policy provides measures to boost regional connectivity, including imposing a small levy on domestic tickets, initiatives to develop new airports, separate regulations for helicopters and steps to boost skill development in the aviation sector.

In a report, brokerage firm Motilal Oswal said the policy takes an integrated approach to take flying to masses and has set an ambitious target of 300 million domestic passengers by 2022 from 85 million in 2015-16.

Under the regional connectivity scheme, which will be in place in the next quarter, fares for a one-hour flight will be capped at Rs 2,500.

"... this would cap ticket prices on regional routes, which is a negative for airline companies, given the government's intervention and price control," Crisil Research said in its report.

According to the report, further clarity is awaited in terms of whether a fare of Rs 2,500 per hour would be capped even for last-minute bookings under the regional connectivity scheme, among other factors.

"The levy proposed to be charged on air tickets for regional connectivity fund would marginally increase cost. However, we expect air fares to marginally decline y-o-y in 2016-17 owing to an expected reduction in fuel prices," Crisil Research noted.

Furthermore, it said the policy does not dwell on the long-pending structural issue of high sales tax on aviation turbine fuel (ATF), which diminishes the attractiveness of the sector.

Meanwhile, ICICI Securities, in a report, said the domestic aviation industry is likely to see a strong growth period with air traffic estimated to grow at 14 per cent, helped by a positive outlook for crude prices.

The projection is on a compounded annual growth rate (CAGR) basis for 2016-17 to 2019-20.